Petroleum pricing: as tough as it gets

Three months it was. The government blinked first. The arrangement with the IMF to periodically increase the Petroleum Levy (PL) on petroleum products by Rs4/ltr every month, could not last long. It was bound to happen as the strategy was rooted more in hopes of international crude oil prices softening, allowing room to charge more taxes. Oil prices instead reached a seven-year high.

There is still every chance of the government turning back on the decision, as happened in November 2021. The language used in the government communication suggests it could well be a repeat of November 2021, albeit over the next few days. Regardless, the taxation equation of petroleum products has taken a big hit.

The General Sales Tax (GST) on both petrol and HSD has continued to go down, as the PL was being raised. The net equation is not much different from the months leading to January 2022 – only that there will be a bigger hit on GST proceeds, which are part of the divisible pool under the NFC. From zero PL in July and August 2021, the roles have been reversed in February 2022 – with GST completely abolished (see: Petroleum revenues, published January 07, 2022).

Not only has the GST been abolished, the PL has been cut down on both HSD and petrol. The biggest axe has fallen on HSD, where the tax incidence has reduced from Rs24.59/ltr in January 2021 to Rs9.3/ltr for February’s first fortnight. HSD’s base price at Rs125/ltr is the highest ever, whereas petrol’s base price is close to the highest ever at Rs121.7/ltr.

From what it appears, the base Arab Gasoline petroleum price for the second fortnight of the ongoing month has little chances of going down. This puts the government between a rock and a hard place, as the IMF is yet to formally approve the continuation of the programme. Interestingly, the combined HSD and petrol consumption remains undeterred, even at all-time high rates. With inflation in the double-digits, and no respite on offer in the near future, petroleum pricing will remain a tough nut to crack for Islamabad.